Lease Vs Rent

Lease and rent both relate to utilizing an asset, belonging to a third party, to generate returns. However, leasing is different from renting. They differ from each other with respect to duration, change in rentals, terms of the agreement and purchase option.

Rent is a part of leasing. Usually, lease contracts are fixed for a duration and terminate after the contract term is over. Renting is very commonly used in real estate whereas leases are more popular in industrial and transportation sectors, where heavy machinery or high-cost tools are utilized.

Similarities

Key similarities between renting and leasing are stated below:

Lease Vs Rent

Asset

Leasing and renting are both related to an asset which is not owned by the business. Here, an asset is defined as anything possessing a monetary value which is owned by another firm or individual.

Accounting Treatment

Rents are treated as operating expense under profit and loss statement. Operating lease rental is also treated as operating expense. Capital lease payments usually have two components: lease expense and interest on outstanding lease amount. Lease expenses are classified as operating expense whereas interest expense is recorded in the interest line. In a hire-purchase transaction, the hirer is allowed to claim depreciation and in leasing, the lessor is allowed to claim depreciation.

Taxation

Tax treatments for both rental (hiring) expense and lease expense (for both operating and finance lease, including the interest expense) are similar. These expenses are considered to be operating expenses and hence are tax deductible. Tax is calculated on operating profit after interest (PBT). Such expenses appear in the balance sheet above the PBT and hence are tax deductible.

Differences

Key Points of Difference between Renting and Leasing

Points of Differences Renting (Hiring) Leasing

Duration

Rental agreements have no set period or term and as such do not necessarily require one to enter into a contract. Lease agreements are usually contracts and have set term and duration.

Change in Rentals

Rental payments can differ from month to month. Lease payments are fixed for the entire duration of the lease and are usually decided at the beginning of a lease period.

Terms of Agreement

Either party to a rental agreement can change the terms of the agreement, at the end of any month, in most asset cases. Unlike renting, under leasing, none of the parties can change terms of agreement during the lease period as lease terms are fixed while entering into the lease agreement.

Long-Term Contract

Renting is usually used in cases when an asset is required for a short duration and entering into a long-term contract is financially unviable and not required. If a business needs an asset for a longer duration (say 10 to 100 years) and is ready for financial commitment, it is advisable to enter into a fixed term, longer duration contract. This also helps in the budgeting process.

Purchase Option

At the end of a rental contract, the person renting out an asset has to return the asset to its owner. At the end of a lease contract, the lessee has an option to extend the lease, return the asset or purchase it for its salvage value.

 

References:

Last updated on : March 10th, 2018

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